Thursday, January 7, 2016

Duty of Good Faith in Contract

Data & Scientific Inc. v Oracle Corp., 2015 ONSC 4178:

[10] I do not accept this submission. This is not what the Court said or intended, at least not in this decision. In Bhasin, an obviously important development in the continuing modernization of Canadian contract law, the Court in essence, did two things: one, it recognized that the 'situational' and 'relational' examples or pockets of a judicially recognized good faith doctrine were aspects of a broader organizing principle of good faith – "that parties generally must perform their contractual duties honestly and reasonably and not capriciously or arbitrarily;"[4] and two, the Court decided on the facts before it that it was time to recognize a new duty - "a general duty of honesty in contractual performance."[5]

[11] The Court made clear that this new duty of honesty in contractual performance flowed "directly from" and was an "aspect" (albeit "one of the most widely recognized aspects") of the general organizing principle of good faith.[6] In other words, the pre-existing situational and relational aspects or pockets of implied good faith (such as the obligation to exercise discretionary contractual powers reasonably) were not eliminated but were simply realigned under a broad organizing principle of good faith.[7] And the newly established duty of honesty in contractual performance was applied on the facts in Bhasin to confirm that the defendant Can-Am breached this duty by misleading the plaintiff and acting dishonestly in numerous ways leading up to and including the non-renewal of their agreement.

[1] McCamus, Law of Contracts (2005) at 791 summarized the case law as follows : "Where discretionary powers are conferred by agreement, it is implicitly understood that the powers are to be exercised reasonably."

[2] The other two 'situational' examples or pockets of good faith, as confirmed by the Supreme Court in Bhasin v Hrynew,2014 SCC 71 (CanLII) at para. 47 are (2) where the contracting parties must co-operate to achieve the objects of the contract and (3) where one party seeks to evade contractual duties. In addition to these three 'situational' pockets, there are three "classes of relationships" where Canadian contract law has implied a duty of good faith: the employment, insurance and tendering contexts. Bhasin, at paras. 53-57.

[7] The Court explains at para. 68 that just as it did in developing an organizing principle in the area of unjust enrichment "without displacing the existing specific doctrines" so too "with regards to the organizing principle of good faith." Also see para. 66: "The organizing principle of good faith manifests itself through the existing doctrines about the types of situations or relationships in which the law requires in certain respects honest, candid, forthright or reasonable contractual performance." (Emphasis added.)